The Implications of Saudi Arabia’s New Arbitration Law on Enforcing Arbitral Awards in Saudi Arabia

On April 12, 2012, the Saudi Arabian Council of Ministers approved a new arbitration system aimed at expediting the process of resolving disputes between two parties. Although the issuance of executive bylaws is still underway, the Council of Ministers has already taken steps in outlining the basic features of the new law. On April 13, 2012, the official newspaper of Saudi Arabia Um Al-Qura reported on its front page the most prominent of these features. The first one clearly and boldly states, “without prejudice to the provisions of the Islamic shari'ah,” the provisions of the Arbitration Law will apply to arbitrations held under the Saudi Arbitration Law.

These “provisions of the Islamic shari’ah” must be considered by parties when contemplating arbitration as a means of resolving disputes when judgments may need to be enforced in Saudi Arabia. This is especially the case for arbitration held in non-Islamic forum states, where arbitrators may not be well versed in Islamic law. The new Arbitration Law, in subjecting its application to the provisions of shari’ah, follows a basic policy consideration common to Saudi Arabian legislation: no law may be made or enforced if it contains a provision contrary to shari’ah.

Practically speaking, this can have serious repercussions in foreign arbitration applying the laws of a non-Islamic country. For example, an arbitration held in Paris applying New York law may issue a damages award that includes pre-judgment interest. Because the payment of interest (riba under shari’ah) is prohibited by the Qur’an as unjust enrichment, Saudi Arabia has applied a ban on the charging of interest. This is not always fatal in the enforcement stage of an arbitral judgment awarding interest, since the interest payment may be severed from the rest of an award. However, in cases where an interest payment in integrated into the award or is unseverable therefrom, the Saudi Arabian Board of Grievances, which must confirm a foreign judgment before enforcing it in Saudi Arabia, may require the entire damages portion of an arbitration (or foreign litigation) to be reheard. In cases where damages is an issue in dispute, re-adjudicating the issue can become costly and time-consuming.

The fact that Saudi Arabia is a State party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) does not necessarily alleviate these challenges, even when the State in which the arbitral award was issued is also a party to the Convention. Article 8(1)(g) of the Saudi Arabian Grievances Board Law requires the Saudi Arabian courts to refuse to enforce any foreign judgment that contravenes the Islamic shari’ah, as interpreted and applied by the Saudi Arabian courts. A public policy exception to the requirement that Saudi Arabia recognise foreign judgments is similarly provided by Article V.2(b) of the New York Convention. What this means is that parties may spend months or years resolving an issue, only to find the judgment of an arbitral panel or court to be unenforceable in Saudi Arabia.

Of course, judgments are at risk of public policy challenges in the enforcement stage in all countries. However, in Saudi Arabia, which applies an ultra-conservative interpretation of shari’ah, these risks are pronounced. Public policy issues are not limited to the narrow question of interest payments; they apply to any judgment that incorporates a legal theory or institution expressly forbidden by shari’ah, including, by way of example, judgments ordering the payment of speculative or consequential damages, contracts with elements of speculation (gharar) and judgments enforcing foreign exchange contracts.

This means that the prevailing party in an arbitration held outside of Saudi Arabia may encounter significant challenges in enforcing the award against a judgment debtor’s assets based in Saudi Arabia. Parties that may one day need to enforce a judgment in Saudi Arabia can be spared of these challenges by simply submitting to Saudi Arabian choice of law and choice of forum. In arbitrating disputes in Saudi Arabia by an arbitral panel comprised of experts in Islamic shari’ah, and more specifically, the Hanbali school of shari’ah applied in Saudi Arabia, the prospects of judgments being issued that contravene Saudi public policy will be minimal, thus reducing the chances of issues arising in the enforcement stage.

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